Counting the costs of franchising

Franchising offers ambitious entrepreneurs an appealing way to expand their venture but they must factor in all the initial and long-term costs before jumping in

When a business is going well, it’s only natural for the owners to make plans to expand at home and perhaps abroad. But the costs of doing this in terms of time and resources, as well as the potential financial risks involved, can be off-putting. After all, the costs of leasing premises, buying extra stock or hiring and training new staff must be funded, often through borrowing or investment. Franchising offers an appealing and more stable route to growth for entrepreneurs but it’s also important to be aware of the potential pitfalls.

One area where franchising can be particularly cost-effective is when it comes to setting up shop in another location. Of course a business owner would retain 100% of the margin by opening their own locations instead of just a portion. But with franchising they can enjoy better overall returns with less risk. After the initial outlay by the franchisor to set up the franchise model and system, all the costs associated with establishing the new outlets are borne by the franchisee. Not only do they pay for the right to use the brand name and the company’s know-how but they also use their own capital to set up, promote and develop the business in their territory.

And while the franchisee takes care of many of the costs associated with expansion, the business as a whole can often benefit from more competitive group purchasing rates or discounts. As the network expands, the franchisor may be able to negotiate competitive prices for their own locations and for their franchisees. This can reduce running costs and improve the company’s bottom line and market share.

Calculating your pre-franchise costs

But tempting that these benefits might be, budding franchisors need to be realistic about the initial costs of getting a business franchise-ready. For example, they may have to invest in protecting their trademark in the UK and potentially the rest of Europe too, if they haven’t done so already. This can cost as much as £1,500.

And since most entrepreneurs are relatively new to the ins and outs of the franchising industry, many seek professional expertise. Franchise consultants help businesses with everything from initial feasibility planning to putting together a competitor analysis. All this advice comes at a cost though. This can range from anything from £5,000 to £20,000, depending on how involved the consultant gets in the business.

Along with general business or financial consultants, getting help with making sure the franchise agreement is legally sound is another expense to factor in. The franchisor’s relationship with the franchisee will be governed by a legal agreement and it’s massively important that this agreement is strong and prepared by a lawyer whose previous work has been tested in court. Ideally the lawyer will be affiliated with the bfa. While legal fees can vary, you should expect to pay something in the region of £5,000 for a lawyer and all the various ancillaries.

Furthermore, it’s important to make sure that when your first franchisees come on board, they’re able to draw on systems and processes. This will enable them to roll out your concept consistently without you having to micromanage from a distance. For a start, you’ll need to ensure your customer relationship management system is up to scratch and that your website – and the content management system behind it – can support additional people creating localised content. You’ll also need to have all your procedures, protocols and guidelines documented. For example many businesses don’t have a substantial operations manual. Creating high-quality manuals written by someone with experience can cost £7,500 upwards and the process of documenting things that are taken for granted can be painfully time-consuming.

Next, you’ll have to fork out on finding your first franchisees or all your expenditure so far will have been in vain. You’ll need to have a recruitment website, marketing collateral – including a franchise prospectus – and a more in-depth offer document that details the business opportunity. You may also need to invest time and money in social-media advertising and franchise events. As for PR, creating a buzz might require you to hire an agency or invest your own time. But even once an initial batch of franchisees has come on board and you start recouping some of your initial outlay, there are some ongoing costs to consider. You will need to keep paying to attract new franchisees to grow the network further and the head-office team will need to spend time on training and on-the-ground support for franchisees. The first year in particular can be demanding as franchisees need a bit more support to get the hang of things.

And while franchisees will likely invest in local marketing initiatives to grow their customer base, they’ll also expect ongoing support, direction and collateral from head office. You’ll need to continually invest in marketing initiatives online and offline through PR, social media, search-engine optimisation, photography, events and more. They bought the franchise based on the fact that the company has a good reputation and it’s up to the franchisor to ensure that there’s no drop in brand awareness.

Has it all been worth it?

All this can amount to a substantial expenditure and it can take some time to see a return, especially since early-stage franchisees won’t be strong revenue contributors from day one. It can take as long as three years to recoup all the outlay, start making a profit from franchising and establish a consistent revenue stream from the network. At a later stage, many franchisor investors start looking at the option of handing the reins over to the next generation or making an exit, much like brands like Belvoir, the letting agents franchise, and TaxAssist, the accountancy franchise, have done.

So while there are undoubtedly lots of costs associated with becoming a franchise, there are plenty of returns for those who get it right.

About the Author

After enjoying a long career with Barclays Bank, Williams joined Ashtons Franchise Consulting to help businesses on their franchising journey. When he’s not on the squash court, the consultant can often be found speaking at industry events.